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Are Airbnb & Short-Term Rentals the Best Option?

Airbnb is an online platform open to hosts (landlords) and guests/travellers (tenants), that enables the hosts to lease vacation and apartment rentals, hostels, homestays and hotel rooms on a short-term basis (on average in SA – 4.3 nights).  There are more the 640 000 Airbnb hosts active in 191 countries, and an estimated 150 million users. In South Africa alone Airbnb hosts welcomed over 400 000 guests in 2016, with a total of R817 million earned by hosts.

Caxton Central writes that “Although these figures show a great potential in boosting tourism and contributing to the GDP, some kind of regulation is needed to make sure it does not affect living conditions of South African renters.”

Although South Africa is still an emerging market, in August of last year Airbnb reported that the platform had generated an estimated R2.4 billion in total economic activity the previous year. In the report,  Across The Brics:  How Airbnb Connects The Emerging Economies, South Africa surpassed Brazil, Russia, India and China with the highest growth in guest arrivals. In the same report, the income earned by South African hosts from BRICS-based guests was also the highest of the five countries. Given the South African economy is it any wonder so many cash-strapped consumers are strongly considering the additional income-injection that Airbnb offers to its hosts.

Undoubtedly Airbnb is a lucrative service that generates attractive returns. But at what cost?

Murray Cox of Inside Airbnb stated that Airbnb [was] being used to compete with the residential housing market. The problem being that many landlords are opting to keep their properties for solely short-term purposes, which poses two main problems. Firstly, demand for quality rental property across the country already far exceeds supply. When choice rental property is removed from the long-term leasing market it makes it exceedingly more difficult for residents to find accommodation, forcing them to settle in areas further from their offices. Not only does this radically increase the money spent on travel and petrol, but the additional travel time reduces the time spent at home with family and loved ones. Secondly, Airbnb hosts are driving up the residential rental prices and making it near impossible for residents to remain in certain, central areas. This is especially evident in the low- to middle- income residents.

According to Andre de Villiers, a Cape Town real estate investor: “There is a level of desperation linked to those looking to secure permanent accommodation and as the pool of long-term rental properties shrinks, the more tenants will struggle to find a reasonably priced rental.”

Another concerning factor is that Airbnb is largely unregulated in South Africa. “Regular” landlords enter into a lease agreement with the tenant after first screening and qualifying them. The tenant then signs a contractual agreement committing to abide by body corporate rules and look after the property as if it were their own. Breaking this agreement results in serious penalties, whether it be losing their deposit to repair damages or having their lease agreement terminated. The same cannot be said for Airbnb guests. Hosts do not have the security of a fully-screened tenant who has undergone a stringent qualifying process. Rather, the Airbnb platform is built on trust, and travellers are required to submit only a profile photo, cell number and email address. Although the review process attempts to keep hosts and guests accountable, there are pitfalls.

Paul French, commercial director for Coastal Property Management Services, stated that poor quality guests have posed serious problems in the sectional title market, particularly in complexes and estates, where parking, noise, visitors and security are of major importance to permanent residents and homeowners. Frequently changing tenants are both disruptive and a risk to the complex ethos. Sectional Title Schemes have had to employ specific rules to govern the influx of Airbnb guests and to protect the wellbeing of it’s residents.

The benefit of a long-term lease agreement is that the landlord knows how much rental will be coming in and for how long. The tenant agrees to pay the rental for the full period of the lease, and should he need to break the agreement for any reason (relocation, change of jobs etc.) he is required to give 30 – 60 days notice or risk penalties. The landlord also knows a month or more before the lease agreement comes to an end whether the tenants will be renewing their lease agreement – if not, the landlord has enough time to source and screen a new tenant to replace the old. Short-term rentals are more volatile – in one sense the landlord can earn substantially more than the going rate in the area letting out to international guests/travellers on a short-term basis, but in another there is no guarantee when the next guest will arrive. On average Airbnb guests stay as long as two weeks, some for as short as a day or two. Practically speaking, not all landlords have the time and energy to ensure that the property remains let at all times of the year. Realistically there will be weeks or months where the property remains empty, and then the hope is that the additional rental income made during peak season is enough to continue paying the bond and other running costs during the quiet period. Simply put, there is a certain degree of security in a long-term lease agreement that does not exist with short-term rentals.

There are also tax implications to consider, cautions Jeremy Burman of Private Client Holdings.

“The earning of rental income, in which category Airbnb income would fall, is regarded as a trade by the SA Revenue Service (SARS). The owner of the Airbnb property must declare all rental income received or accrued during the tax year. He will in turn be entitled to deduct any expenses incurred in the earning of this income with the result that only the net profit will be taxable.”  Adequate provision needs to be made to cover any tax liability.

 

Airbnb boasts that 97% of the listing price goes directly to the host, with only a 3% service fee to Airbnb. However, landlords should bear in mind that the administration fee/commission to estate agents covers more than just finding and placing the tenant. Astute landlords select reputable estate agents for their industry experience and in-depth market knowledge, and for a host of other reasons.

Etchells & Young Property Brokers offers landlords extensive advertising of their property on a number of prominent online property portals, as well as coordinating property viewings with potential tenants, stringent tenant vetting and screening, thorough TPN credit checks, deposit and first month rental collection, facilitating the signing of the lease and key handover, conducting both entry and exit inspections, and consistent communication with the clients. Over and above this, E&Y hosts a dedicated staff complement in-house and in the field who are uncompromising in their value systems and 100% committed to client service.

 “In a tough economic environment where most South Africans have had to tighten their belts, the alternative income stream offered by Airbnb is an attractive proposition – additional income with minimal attendant expenditure,” said Burman. “However along with packing away family heirlooms and clearing cupboard space, owners must keep adequate records of this side-line business to ensure tax efficiency and the ability to meet all resultant tax obligations.”

Airbnb is undoubtedly a lucrative business model and is benefitting both hosts and guests around the world. Before signing as a host, ensure that all avenues have been explored and critically assess the practical implications of managing an Airbnb property – time, energy, the cost of replacing an ongoing stream of consumables (soap, cleaning supplies etc.) and rising utility bills.

Good quality tenants are becoming increasingly difficult to find and secure. Avoid opting for a short-term high rental in place of a permanent, good quality tenant.